THOUSANDS of pensioners could be hit with a £1,049 tax hike under Rachel Reeves’ Budget plans.
The Chancellor is considering plans to hike income tax rates and lower National Insurance rates by 2 percentage points.
But pensioners would be among the hardest hit by the plans, according to analysis by stock broker AJ Bell.
Pensioners don’t pay National Insurance, which means they would be hit by the increase in income tax but would not benefit from the 2p cut to National Insurance.
As a result, a pensioner who has a retirement income of £35,000 would see their overall annual tax bill rise by almost £449 under the plans.
But an employee who earns the same amount, which is roughly the national average wage, would not pay any more tax.
Meanwhile, a pensioner with an income of £65,000 would be hit with a tax increase of £1,049.
The move would mean the Chancellor avoids breaking her manifesto pledge not to increase taxes on “working people”.
The measure could raise a chunk of the billions the Chancellor needs to find in the Budget in order to plug a £30billion hole in the public finances.
But economists have suggested that the size of the hole could be even bigger, after the most recent figures from the Office for Budget Responsibility were worse than expected.
The news comes at a time when pensioners are already struggling to pay their bills, with food and energy prices draining their wallets.
The move is likely to be very unpopular, particularly in the wake of the Winter Fuel Payment fiasco, when millions of pensioners lost the vital cash payment.
Tom Selby, director of public policy at AJ Bell, warns pensioners “would be clobbered under the plans”.
He added: “Labour’s pledge not to increase rates of income tax, National Insurance or VAT for ‘working people’ has left chancellor Rachel Reeves playing mental gymnastics in her increasingly desperate attempts to balance the books without completely abandoning the manifesto.”
What other changes are being considered?
The Chancellor is also said to be considering reforming the council tax system in order to tax wealthy homeowners more.
Under the plans Rachel Reeves would introduce new tax bands, which would mean more expensive homes pay more tax.
The measure could also be implemented quickly, as the council tax bands are already in place.
Meanwhile, the Chancellor is also said to be considering slashing tax relief for pensions.
Currently, when you save into a pension, the government gives you back the income tax you paid on that money.
You get tax relief based on your rate of income tax.
If you are a basic-rate taxpayer this means you get a 20% top up, so an £80 pension contribution is boosted to £100.
But the Chancellor is reportedly considering making a huge change to the rules to bring in a flat rate of 25% for every saver.
As a result, high earners would see their tax relief slashed.
The Chancellor is also considering plans to slash the tax-free cash lump sum.
Currently, savers can take a quarter of their entire pension pot when they retire, without needing to pay tax on it.
Many retirees use the money to pay off big expenses such as clearing debt or their mortgage.
But experts suggest the government might cap this amount – or remove the rule entirely.
Fears are also mounting that Rachel Reeves could abolish salary sacrifice schemes.
Employers offer these schemes to lower your salary in return for paying the difference into your pension.
As a result, both you and your employer pay less National Insurance as your salary is lower.
Abolishing salary sacrifice would hit more than three million basic-rate taxpayers as their take-home pay would shrink due to higher National Insurance payments.
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